What is tax avoidance?

[jbryce]

That bit I understand

What I can't fathom is that if you have to tell a lie ("I am a car dealer", "that money is a loan") in order to make a tax avoidance scheme "work", why is that not fraud.

No idea about being a car dealer, but as for loans - they are actually loans and for the EBTs you paid a tax on the benefit. HMRC even see them as loans out of a trust and expect, in some cases IHT. The fraud may come in saying that these are perfectly legal avoidance mechanisms, and the joke of it all is - they probably are legal avoidance mechanisms.

Avoidance is a legally complex and difficult area made so by our bonkers tax laws. HMG has introduces the GAAR to rule on such mechanisms because they acknowledge that fighting legal avoidance through the court has proved difficult.

[malvolio]

No idea about being a car dealer, but as for loans - they are actually loans and for the EBTs you paid a tax on the benefit. HMRC even see them as loans out of a trust and expect, in some cases IHT. The fraud may come in saying that these are perfectly legal avoidance mechanisms, and the joke of it all is - they probably are legal avoidance mechanisms.

Avoidance is a legally complex and difficult area made so by our bonkers tax laws. HMG has introduces the GAAR to rule on such mechanisms because they acknowledge that fighting legal avoidance through the court has proved difficult.

But that's my point. The loans from an EBT are a tax avoidance vehicle intended to maximise returns from a pension fund post retirement, when you have no more income to play with (that's also the source of the confusion over IHT; look at it from a pension provision viewpoint and IHT is an entirely logical outcome).

They were not intended as a way to reduce taxes on earned income; the problem is the law doesn't explicitly state that (gosh...) hence the uncertainty as to their validity.

Also the GAAR is basically to allow HMRC to challenge any arrangement they see as outside the intent of the law; the piddling amount they will try to get from one man bands is a side effect of an attack on corporate taxation reduction and salary optimisation plans: they are firstly trying to stop people using more imaginative schemes in the first place by making anything "out of the ordinary" subject to close scrutiny and closure under a wide-ranging policy. The GAAR is a regulation, not a law, and requires a lower burden of proof: merely that it is agreed to be wrong by a tribunal, not that is contravenes a given law.

It helps your cause if you understand both sides of the argument, even if you don't agree with it.

[jbryce]

But that's my point. The loans from an EBT are a tax avoidance vehicle intended to maximise returns from a pension fund post retirement, when you have no more income to play with (that's also the source of the confusion over IHT; look at it from a pension provision viewpoint and IHT is an entirely logical outcome).

They were not intended as a way to reduce taxes on earned income; the problem is the law doesn't explicitly state that (gosh...) hence the uncertainty as to their validity.

Also the GAAR is basically to allow HMRC to challenge any arrangement they see as outside the intent of the law; the piddling amount they will try to get from one man bands is a side effect of an attack on corporate taxation reduction and salary optimisation plans: they are firstly trying to stop people using more imaginative schemes in the first place by making anything "out of the ordinary" subject to close scrutiny and closure under a wide-ranging policy. The GAAR is a regulation, not a law, and requires a lower burden of proof: merely that it is agreed to be wrong by a tribunal, not that is contravenes a given law.

It helps your cause if you understand both sides of the argument, even if you don't agree with it.

I don't think I said the GAAR was a Law - it's intention is to allow HMRC to nail avoidance arrangements without initial recourse to the courts. It's a good thing in that it allows HMRC to react to schemes quickly without having to arse around playing catch up. They can also issue APNs off the back of a GAAR ruling - that should surely dissuade some scheme suppliers and their customers. Having said that - the GAAR has not been used against a single contractor scheme - HMRC need to pull their finger out and use it.

As for both sides - I do understand them and, in general, I think HMG/HMRC has a right to minimse avoidance. That goes for simple avoidance and more esoteric avoidance - such as EBTs etc. But HMRC are not the law and, much as they dislike it, they will have to win their cases through the courts as the law intended. That's a good thing.

A lot of us use Limited companies, it confers an advantage that, arguably, HMRC did not intend us to have. They have tried, and to a large extent failed, to muddy the waters with IR35 and I'm sure they will come around again for another bite. In the end, to work within the law as HMRC would prefer, all contractors would work through Umbrellas and pay tax and NICs as intended by HMRC.

[centurian]

No idea about being a car dealer, but as for loans - they are actually loans and for the EBTs you paid a tax on the benefit. HMRC even see them as loans out of a trust and expect, in some cases IHT. The fraud may come in saying that these are perfectly legal avoidance mechanisms, and the joke of it all is - they probably are legal avoidance mechanisms.

But they are not really loans are they - the documentation may well be place to say they are, but there must be some gentlemen's agreement that they are not actual loans that will ever be called in, which means one or more parties are making statements which are not strictly true.

Maybe I just don't understand the law enough - I just never understood why HMRC don't even so much as try to make a case for fraud on certain schemes.

[StrengthInNumbers]

They are loans with properly witnessed and signed agreements. No side letters or any gentlemen agreement. If trustee will recall loans will have to be paid back whatever a contractor or promotor might say.

[jbryce]

But they are not really loans are they - the documentation may well be place to say they are, but there must be some gentlemen's agreement that they are not actual loans that will ever be called in, which means one or more parties are making statements which are not strictly true.

Maybe I just don't understand the law enough - I just never understood why HMRC don't even so much as try to make a case for fraud on certain schemes.

Gentlemen's agreements have no standing in law, and are not enforceable - so any such agreement is not worth anything. Avoidance utilises the law to minimise the amount of tax that is paid. Avoidance is legal.
Because our tax regime is so complex the use of loans and other mechanisms to avoid tax may be not as HMRC intended, but it is still a mechanism. Fraud becomes an issue if the provider lies to the mug using the scheme - for example misrepresenting a QC opinion or not running the scheme as advertised.

The GAAR makes this all much more difficult as the GAAR doesn't have to pursue a scheme through the courts and an APN can be issued off the back of a GAAR decision. Post 2013 anyone in an avoidance arrangement is mad.

[DonkeyRhubarb]

Post 2013 anyone in an avoidance arrangement is mad.

And anyone who is still in one now is even more insane.

[StrengthInNumbers]

I have been limited company since 2013 but God knows if HMRC considers limited company as avoidance or not.
I hope they don't. No other way to be a contractor!

[jbryce]

I have been limited company since 2013 but God knows if HMRC considers limited company as avoidance or not.
I hope they don't. No other way to be a contractor!

Yes there is - you can use a legit umbrella company.

[centurian]

Yes there is - you can use a legit umbrella company.

And even then - be careful about submitting "expense" claims, which a legitimate umbrella may well approve, but HMRC are cracking down upon